Author's Note: Today’s difficult times can actually be a blessing in disguise, allowing CFOs to drive through changes in their organizations, with the objective of preserving, improving and productively deploying cash flows. Cash flow needs to be a key metric in evaluating business and operating performance. Cash flow management improves with obtaining more visibility into cash generation and deployment and by weaving cash flow discussions into daily dialogues at companies..
CFOs: ARE YOU LISTENING?
Preserving cash flow seems to be the number one priority for most CFOs today. They realize that there is no substitute for cash in this era of economic uncertainty. A recent report in the Economic Times by the Center for Monitoring Indian Economy (CMIE) stated that large enterprises like Reliance Industries, Infosys, Coal India, Wipro and TCS have cash and bank balances of approximately INR 800 billion crores ($ 14.5 billion).
What is interesting is the fact that these companies have added more than 25% of the cash and bank balances in the last 12 months. The CMIE data also showed that out of the 85 companies in the BSE 100, cash and bank balances of nearly 45 companies (excluding banks and financial services firms) had gone up. Market observers feel that companies are being cautious with their expansion plans (especially IT firms who are waiting for the valuations in Europe to come down to make acquisitions).
||Enterprise Cash Flow: The importance of staying liquid!
ENTERPRISE CASH FLOW: THE FUEL FOR STRATEGIC FLEXIBILITY
Businesses have never been more complex, with the number of products, services, channels and markets multiplying all the time. CFOs are under pressure to demonstrate that they are paying full attention to working capital arrangements. The credit crunch may not feel like a blessing for finance departments and for the CFOs, but it does present an opportunity to push through changes to manage their working capital better.
What the companies listed above teach us is that achieving sustainable improvement over the long term requires cash management to become an integral part of everyday life and that companies should consider the cash flow impact of decisions in addition to the sales and/or profit effect.
Visibility and control of cash flow is also a key ingredient in creating the right operational framework for managing cash. Inaccuracy of forecasting is only a part of the problem; the real issue is that most companies don’t use that metric as part of their assessment of operational cash performance. The finance function and the CFO in particular, need to engage with all parts of the business to drive the awareness and importance of cash conservation and working capital management.
Cash conservation and working capital management are set to remain high on corporate agendas. The companies that win in this economic environment will release cash from their business. They will use this opportunity to embed cash into the organization culture and maintain a healthy balance between cash and earnings when the “good times” are back.
CREATING AN ENABLING FRAMEWORK FOR CASH MANAGEMENT: OUTSOURCING?
With highly volatile forex and interest rate movements, these are very fluid market conditions. It is all the more essential for a CFO to not just monitor and match cash inflows versus cash outflows; but also to keep a tight focus on generating and preserving cash. One commonly used strategy is to swap higher interest rate debt with lower rate instruments, leaving the rate differential amount as free cash and adding it straight to the bottom line.
Recent trends show the potential for using outsourcing service providers to improve the performance of cash/treasury management tasks, a truly critical part of the finance and accounting (F&A) function. The
CFOs can engage specialized outsourcing partners to:
- Produce weekly/monthly cash flow analysis and prepare cash flow forecasts for better control over treasury
- Monitor account receivables (e.g., daily/weekly collections, average DSO, real-time tracking of incoming bank transfers or cash-in-transit etc.)
- Monitor account payables (e.g., weekly or bi-weekly payment schedules, vendor payment discounts, using free floats like credit cards, avoiding late payment penalties, timely payments for utility services etc.).
In fact, companies can even cut back on interest costs by ensuring the free cash thus generated is deployed to repay borrowings.
To conclude: you can hardly over-emphasize the importance of preserving cash even if you are a cash-rich organization in today’s environment. On the other hand, your long term business growth could be adversely affected, if cash reserves are not being put to productive use when an opportunity arises. These include expansion of incumbent business, acquisition and investment in new businesses to add stakeholder value. Always evaluate these options keeping in mind cash management issues. And if you are looking for ideas, help is just a click away!
Do you think outsourcing would create an enabling framework for cash management? Do share your thoughts with us in our comments section.